Wealthy Hand‐to‐Mouth Households in China

• DOI: http://doi.org/10.1111/asej.12123
• Author: Zhen Cui,Yalan Feng
• Published date: 01 September 2017
• Date: 01 September 2017

Wealthy Hand-to-Mouth Households in China*

Zhen Cui and Yalan Feng

Received 22 April 2016; accepted 6 May 2017

The wealthy hand-to-mouth are households who are poor in liquid wealth

(e.g. cash and checking accounts) and rich in illiquid wealth (e.g. housing and

retirement accounts), while the poor hand-to-mouth are poor in both liquid and

illiquid wealth. Data from the China Household Finance Survey reveal the follow-

ing facts about the country’s wealthy hand-to-mouth. First, they represent the

majority of the hand-to-mouth households in China. Second, they have different

wealth portfolios and demographic features from the poor hand-to-mouth. Finally,

they have larger consumption responses to income fluctuations than non-hand-to-

mouth households, after controlling for endogeneity, income, hand-to-mouth sta-

tus and other household characteristics.

Keywords: consumption, hand-to-mouth, household portfolio, liquidity.

JEL classification codes: D31, E21.

doi: 10.1111/asej.12123

I. Introduction

This study focuses on a group of households called the wealthy hand-to-mouth

(W-HtM). Kaplan and Violante (2014) are the first to recognize these house-

holds through the lens of liquid and illiquid assets. Liquid assets are low return

free-to-adjust assets (e.g. checking accounts and cash) and illiquid assets are

high return costly-to-adjust assets (e.g. retirement accounts and housing). The

two-asset framework induces two types of hand-to-mouth (HtM) households

instead of one as under the traditional one-asset setting in which the single asset

corresponds to a household’s net worth (i.e. the sum of liquid and illiquid

wealth). Specifically, the first type called the poor HtM (P-HtM) refers to house-

holds who have little or no liquid wealth and no illiquid wealth. The second type

is the W-HtM, referring to households who have little or no liquid wealth but a

sizable amount of illiquid wealth. Through the lens of net worth, the W-HtM

will be overlooked due to their fairly large illiquid asset holdings.

*Cui (corresponding author): Department of Economics and Statistics, College of Business and

Economics, California State University, Los Angeles, 5151 State University Drive, Los Angeles, CA

90032, USA. Email: zcui@calstatela.edu. Feng: Department of Finance and Law, College of Busi-

ness and Economics, California State University, Los Angeles, 5151 State University Drive, Los

Angeles, CA 90032, USA.

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© 2017 East Asian Economic Association and John Wiley & Sons Australia, Ltd

Two features make W-HtM households special. First, similar to the P-HtM,

the W-HtM have a large marginal propensity to consume (MPC) out of small

transitory income shocks. Using the US Panel Study of Income Dynamics

(PSID) data, Kaplan et al. (2014) find that W-HtM and P-HtM households have

significantly larger MPC out of transitory income shocks than non HtM (N-

HtM) households. The structural model developed by Kaplan and Violante

(2014) thoroughly illustrates the underlying rationale. In short, the W-HtM have

their wealth tied up in assets that are too costly to access, and thus live paycheck

to paycheck just like the P-HtM. For W-HtM households, it is optimal to forego

consumption smoothing in the short run because the high return generated by

their illiquid wealth will lead to a higher level of consumption in the long run.

Hence, if given fiscal stimulus payments during a recession, the W-HtM will

spend most of the payments as their income falls.

Second, in contrast to the P-HtM, the US data reveal that the W-HtM are

more similar to the N-HtM in terms of demographics and wealth portfolios

(Kaplan et al., 2014). For example, the median annual income for the W-HtM

in the USA is $50 000 (compared to $20 000 for the P-HtM and $70 000 for

the N-HtM). In addition, W-HtM and N-HtM households are less likely to be

on welfare and tend to hold similar fractions of illiquid wealth in housing.

Therefore, the W-HtM are not low-income, low-net-worth households who are

traditionally considered poor. Together with the first feature, this challenges the

conventional thinking that cash stimulus to high-income households will not

raise consumption because the money is more likely to be saved. Instead, this

suggests that fiscal stimulus programs could potentially stimulate the economy

even more if they also target W-HtM households.

Against this background, the present study examines the W-HtM using data

from China. It is motivated by two factors. First, to the best of our knowledge,

this is the first study to explore China’s W-HtM households. The existing litera-

ture only focus on the USA and a few European nations. This gap in the litera-

ture is troubling because the concept of W-HtM households is not inherently

unique to the West or high-income countries. Those households could well exist

in a middle-income country, such as China, where citizens can choose to hold

their wealth in a variety of assets. Second, given the policy implications, there is

a pressing need to study W-HtM households in China. Recent data have shown

that the Chinese economy is slowing down, and policy insiders expect that the

country will soon resort to fiscal stimulus to revive growth (Yao, 2015). Thus,

the findings of this study will be helpful in designing fiscal policies that are bet-

ter at targeting the right group of households.

Five main findings are uncovered by analyzing the Chinese data. First,

approximately 17 percent of Chinese households are HtM, of which 90 percent

are W-HtM and 10 percent are P-HtM. Therefore, the HtM in China mostly con-

sist of the W-HtM, who would be ignored by the traditional net worth measure.

Second, while the share of W-HtM households in the population is hump-

shaped across age, the share of P-HtM households slightly increases in age.

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